Rivers: Is the growth in the American economy going to really mess up what the Ontario government has to do to keep inflation at bay?

By Ray Rivers

February 9th, 2018

BURLINGTON, ON

“In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!” (Donald Trump Twitter Feb 7, 2018 – 9:59 AM).

But it’s like pouring gasoline on a fire, sir. The US was already near full employment when Trump came into office. So when Trump’s tax reform bill cut corporate taxes bigly, the US stock market players scrambled over one another to buy up those corporate shares. And that drove up the market to historic levels, that is, until somebody whispered the word…. inflation.

Some inflation is normal in an economy, though it can get seriously out of hand as it did in the 80’s and 90’s. And the instrument of choice to slow it down has been the interest rate. It’s a draconian solution and tough medicine, jacking up the cost of borrowing to the point where the economy borders on recession. We’ve seen this movie before and it ain’t pretty.

While corporate tax cuts may have spurred market volatility, Trump’s middle class tax cuts are also of concern when it comes to inflation. More money in the pockets of the folks who spend almost every penny of it will lead to greater demand for goods and services which in a tight labour economy means inflation.

Mr. Trudeau, in his first budget, in 2016, also cut taxes for the middle class. But Canada’s economy back then was hovering around recession with little danger of inflation. And it worked because today Canada has the fastest growing economy in the G7 with near full employment numbers, especially in Ontario.

A hiccup there means an upset stomach here.

Still when Wall St. hickups, it is felt around the world. So it’s now officially a correction (10% reduction in share values) and the hissy fit is over, but the volatility is still there. And it’ll take more than Valium to chill out those traders who can smell what is coming, even if the US president doesn’t.

Expansionist policies in good times are as wrong-headed as austerity measures during recessions. Instead of adding more money to the US economy as it steams into a wall, Trump should be cooling his jets – election promises not withstanding. Either he does that or the US Federal Reserve will do it for him by raising the interest rates in due course. And Canada will necessarily follow suit.

Rising interest rates will be painful for all us common folk holding serious debt or wanting to remortgage our homes. But it also drives up the cost of borrowing for governments which have let their debt pile up over the years. Canada’s federal government is already more than $700 billion in the red and we pay out about $25 billion annually in interest payments, about a third of that to foreign interests.

The Fraser Institute estimates that debt by all levels of government in Canada now exceeds a trillion dollars and the cost of interest alone is in in excess of $60 billion – roughly what is spent on all primary and secondary education in the country.

Here in Ontario the Wynne government balanced its budget last year, the first time since the 2008 recession, and is now forecasting surpluses and paying down the debt going into the future. Of course that does not include the recent mortgaging of the electrical sector by crown corporation Ontario Power Generation, but that is another story. Still, Ontario’s debt level now exceeds $300 billion with annual interest payments around $12 billion a year.

Caroline Mulroney flips on her carbon policy – decides to go with the party line.

There is a provincial election coming and the currently leaderless Progressive Conservatives are still leading in the polls, despite the fact that their last leader had been forced to resign in disgrace. The party’s election platform had been approved by the membership policy conference late last year and it includes taking Ontario back into deficit territory for at least the first year, should they become government.

This platform has essentially adopted most of the current Liberal programs. But it also includes a notional 22% cut in income taxes that was to be balanced, in part, by a $4 billion carbon tax. The carbon tax, an alternative to Ontario’s current efficient and business friendly ‘cap-and-trade’ program would be modeled on the one implemented in B.C.

Doug Ford was the first PC leadership candidate out of the gate – a significant threat to the Ontario we now have.

Doug Ford was the first leadership contender out of the gate, and his first campaign promise was to not impose the carbon tax. The other two declared candidates at first indicated they’d stick with the platform as it was. But they have now flip-flopped on the carbon tax, taking their lead from Ford and sidling up to his position.

So the questions are what else these wannabe leaders are prepared to rip out of their official election platform? Do they even have a platform anymore? Are they going to ask Ontario voters to put them into office with a whacking on-going $4 billion deficit?

And what will that mean for Ontario’s future budgets when interest rates climb making that debt even more expensive? Will that mean the end of some hard-won health and social programs, such as the pharmaceutical-care plan for our children? Or will we just be plunged back into never ending deficit spending?

Ray Rivers writes weekly on both federal and provincial politics, applying his more than 25 years as a federal bureaucrat to his thinking. Rivers was once a candidate for provincial office in Burlington. He was the founder of the Burlington citizen committee on sustainability at a time when climate warming was a hotly debated subject. Tweet @rayzrivers

8 comments to Rivers: Is the growth in the American economy going to really mess up what the Ontario government has to do to keep inflation at bay?

The majority of Ontario’s Job losses, part-time, will probably turn out to be from Wynne’s radical and dramatic rise of the minimum wage. She did nothing over ten years when she did not need the lowly minimum wagers’ support but now throws them a rotten carrot for a vote.

The part time jobs losses will be proven to be due to the employers inability to maintain their profit margins.

Wynne should have listened to the NDP 10yrs ago and gradually increased the minimum wage to what it should have been.

As Ontario’s hydro costs keep going out of site, and America’s hydro rates, which are sure to be going, down, down, down, there is no doubt in my mind that the future of Ontario’s manufacturing will suffer dearly. Even the cheaper Canadian dollar won’t save our large manufacturers as they seek relief south of the border.

Ray, regarding the stock market I have long had the impression that full or near full employment is anathema to business because it means: As the labor pool evaporates down to the truly unskilled or troubled individuals employers are less able to separate undesirable employees since replacing them becomes much more difficult. This also means employees are in a better position to demand pay increases. So, having watched the unemployment numbers fall I was not surprised to see stock prices (calculated on future performance, not status quo) decline as well.

As I’ve said before, economics is not my field. But I find your analyses in this area fascinating.

Eva – thanks for your comment – to clarify the point, in fact the losses were mostly (all) part-time jobs and were offset by 49,000 full time jobs…. “Even with the overall decline in January, Canada has been on a strong run of job creation that has seen the country add 414,100 full-time jobs over a 12-month period. The growth represents an increase of 2.8 per cent”.

A news alert from newstalk 1010 this morning that Canada reports big January job losses 88,000 jobs lost last month with the biggest declines in employment seen in Ontario and Quebec. It’s been 9 years since the country has seen one month job losses so deep.